A trust can also be an alternative to a share restructuring exercise to provide different people with different interests and voting powers in the shares.
This is not directly a tax planning point but rather a simpler way of achieving the ownership structure required without producing a complicated share structure that could hamper the future growth or saleability of the company.
Trusts are often included in pensions and life insurance policies and for good reason.
Almost by definition the settlor or person insured is deceased at the time the policy or fund pays out the capital.
The trust (which here may be quite short term) governs the subsequent distribution of these funds that do not fall within the deceased’s estate or will.
It is important that everyone involved understands what it is doing and why it is there. As an aside, this author remains surprised at the number of times the deceased person is the only named trustee, which causes administrative headaches that could be eliminated with a little forethought.
When and how to use a trust
There are circumstances where a trust is inappropriate. Most obviously, this will be where the donor (settlor) still needs access to the assets or the income from them.
If the settlor (or their spouse) retains any benefit from the assets given away they will have a gift with reservation of benefit (GWR) meaning that the value given away remains in their estate although the tax charges within the trust also remain.
There are ways in which to structure a gift into trust that do not fall within the GWR rules, including making a loan to a trust, which can be repaid, or making a gift of capital subject to the settlor retaining the income.
These are non–aggressive and well-established strategies, but it will be interesting to see if steps are taken to limit these opportunities.
Trusts established by parents for their minor children are, for the most part, transparent, with the income and capital gain remaining taxable in the parent’s hands.
There may be good reason to put the assets in trust nonetheless, such as to secure the child’s legal entitlement to them, but there are no tax advantages or reasons to do so.
On creation of a trust a settlor pays 20 per cent (the present lifetime rate) IHT.
There is not usually any capital gains tax to pay as this can be deferred until the trust itself sells the assets. This might be increased if the settlor dies within seven years of the trust’s creation.
The trust also pays IHT at 6 per cent every 10 years on the value within it and a proportion of this decennial charge if property leaves the trust between anniversaries.
